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This Is What Vallabh Bhanshali Thinks Should Be Modi’s Top Priority

The biggest need of the day is to inject liquidity into the economy, says Enam Group’s Chairman Vallabh Bhanshali.

(Source: PTI)
(Source: PTI)

Investment banker Vallabh Bhanshali said the economy is “starved of liquidity” and a “tremendous coordination” will be required between the ruling party, the Reserve Bank of India, the bureaucracy and other key government departments for a recovery.

People voted for Prime Minister Narendra Modi’s government because of two reasons—one, the “alternative was scary”, and second, the people wanted to go to the next level of the agenda that he had promised but remained incomplete, Bhanshali, chairman at Enam Group, told BloombergQuint during an interview.

“The next level is to bring about a fundamental change in the way the country has looked at itself, economically, segments of the society, its culture and position in the world.”

This is a never before opportunity and maybe a never after opportunity to really project India and tap its potential in the way it should be.
Vallabh Bhanshali, Chairman, Enam Group

Going forward, Bhanshali also expects “massive rewards” from the implementation of the goods and services tax and demonetisation, which according to him helped curb black money.

Watch the full interview here:

Edited excerpts of the conversation:

I think it is back to fundamentals as the mandate seems to be of continuity. What is your first reaction when you look at this mandate?

The alternative was very scary. Secondly, they thought that Modi started with an agenda which was incomplete. His agenda was incomplete, and people wanted to go to the next level. Next level is bringing about a fundamental change in the way the country has looked at itself economically, the segments of society, our culture and positions in the world. It is continuity in sense of not having somebody else but more than that it is building on a platform which was laid in the first five years and that’s what my expectation of Modi is that this is a never before opportunity to project India and tap its potential the way it should be.

If that is the belief then what are three-four things which, according to you, have to be enacted to make use of the ‘never before, never after’ opportunity you mentioned?

For example, our independence had to mean the most to our poor and left out people but you have to do it in a manner which was not based on reckless subsidies, which was stolen on mass scale and by not looking at them as poor but as a part of society, to do with dignity. When we started with programs like toilets and Swachhta and Ujwala, this was a massive connect and we need to build on it. Modi has a program of Rs 6,000 a year, but it is a very small amount. How do we bring a change to the way we think of the poor, rural areas, agricultural economy? There are massive issues and opportunities there. For example, unless we think of water in a very significant manner, India will be in serious trouble. Related to water is the energy issue because the way energy was not being paid for or we have sucked up the ground-level water by using excessive energy which was available cheap and so on. Related issues are all held. For example, the food we eat and how we can bring a change in it. These are massive problems, but we just look at rural areas just as vote banks and lip service. We need to bring about a massive change in it. It is extraordinary that Modi used a new phrase yesterday. He said that country has only two communities or sections. Those who are left out and those who are trying to help them. This is a momentous statement. He said that businessmen and industry can help the poor come out of it. So, the second part is to look at business de novo, not as someone who was a necessary evil or who were partners for the so called crony capitalism structure. We need to look at it in a fundamental way. How do we bring lower interest rates? How do we bring friction in doing business? We have a massive opportunity in relocating business from China which has been enabled further by the U.S.-China trade war. So, this is a massive opportunity. The work is cut out for Modi and there is massive amount of work.

Agricultural income is structural deflation. Whether putting more money to work behind a sector wherein incomes by and large won’t rise, wouldn’t it be prudent to may be focus on industrialization, mobilize the disguised unemployment out of agriculture into that pocket. Do you think the Rs 6,000 per year amount has to be increased as that is lot of money going behind trying to reflate the rural economy where the basic income will not move up in a hurry?

That’s not what I mean at all. It is because we haven’t imagined enough about it. The velocity of money which goes in rural area is very different. When you spend on rural infrastructure, when you build the confidence of the rural people, the impact it has is very different. I am not so much in industrialisation as urbanisation. Industrialisation was an evolution in human history. For the first time in the 17th or 18th century, the way it was looked at was different. China was able to create steady jobs. Think of industrialisation as being very important because it created a kind of job. May be that kind of job at a time when the consumer is not loyal to anything as tastes and loyalties to everything are changing fast. In Internet 3.0 or 4.0 world where we have to think of flexible manufacturing, flexible jobs and urbanization enables it. The way the startups have shown promise, we have to build massively on it in solving some problems and creating new designs. A group called Indus group or India stat has given us Aadhaar, Rupay and so on. We need to form several such groups who will look at these not in the traditional manner that we need industrialization only, or if you send money to poor people then it means doles and fiscal indiscipline and so on. I believe that there are solutions which are beyond it. Drip irrigation is expensive. But just as cost of solar power has come down in India massively, why can’t we bring down the cost of drip irrigation? Then we have agricultural surplus at the current prices also. Given our scientific fervor, given what the people of India have done, given the out-of-box thinking possibility with Modi and his government, I think they know the thinking of business and industrial world, our urbanisation and structures and the way they created competition for smart cities and so on. I think a whole new way of administrating the country, thinking of the country will happen because the political sensitivity which Modi rightly had about winning 2019 election has gone down. This man has got no fetish now and I think he will play full throttle.

Last three-four months have shown some bit of sputtering of consumption super cycle which seems to be in. Lot of questions about how the job situation is shaping up, the agrarian youth is becoming a Swiggy delivery boy or Uber driver. But the meaningful jobs are not being created. Will that lead to slowing down in consumption economy where we have started to see the signs?

Lot of answers lie in Bombay and not in Delhi. If you look at the liquidity position, the way banking has been put in tremendous stress first by complete neglect, then by trying to resolve the NPA issue of putting banks into trouble before we thought of solutions for them and the aggregate liquidity and interest rates. We are among the worst in the world for interest rates. Then how can we have demand growth? I think some of them have to come out of the academic ivory towers and look at the reality. Inflation is a welcome product in world and not in India. But something endemic has changed and we have not been caught up with it. The economy has been starved of liquidity and the cost of liquidity in a massive way on the pretext that transmission is not happening, while massive negligence is evident. Lot has to improve on that front. We need tremendous amount of coordination among the government, central bank, bureaucracy and other wings of the government. The whole nation has said that we believe in this policy or the Modi government. We believe in this world and please come together and deliver for us. Whether than happens as it is a democratic process, I think it is an appeal which people seem to have made and I hope that happens.

Do you think that if the RBI takes large dollops of rate action in a short time, then we could see the transmission happening?

Lets look at the overall situation in the last three years. We had demonetisation, GST, NCLT roll out, the election came upon us, we had two bad years in terms of agricultural crop and rural distress. There were many negatives which were playing out which were a fall out of reform moves. But in between, economy showed a lot of promise. This is a chicken and egg story. We don’t have a perfect world and perfect transmission of policies, laws, intent, administrative appointments and so on. So, there are many interferences in the whole process. In the transmission business, we have to look at some of the encumbrances which the banks have to suffer on liquidity which comes their way. Look at the fear of the cost of credit that they can manage. They have to manage their balance sheet and PNL at the same time. There are many liquidities soakers in the system. There are restriction on usage of deposits. If you look at the micromanagement of the treasuries which banks have to do, there are many difficulties. So, I think it is a time where we don’t have a perfect solution. We have to learn and be inspired by what the U.S. and Europe did. Draghi made a famous statement, “I will do what it takes.” The U.S. didn’t even say it but they went ahead and did it. When you see a large problem, you think of the problem as a country and don’t think of textbooks. Every time it rhymes but it plays out differently. We need to think of this not in a classical textbook manner but in the given situation what the mood of the country is, what is the potential and you do take risks with the caveat that lets do this for three-six months and see what is the worst that happens. Our economy needs a kick-start to think that we have a demographic dividend and it is a market for the next 30 years and then worry too much about the next three-six months, I think it is not right. There is something contradictory there.

Everybody is talking about the immediate liquidity crunch. Would you believe that injecting dollops of liquidity in whichever shape or form the government does is the immediate need of the hour and will that be done in your mind?

I think this is the number one requirement. There is no doubt about it. Even the whole world is saying it and only two-five people saying this is not necessary and we have this fear, I am afraid something is missing. This is the number one requirement.

We have seen the disconnect between what has been happening in economy and the the markets. If earnings growth comes back in a world wherein investors are starved of earnings growth, will the markets be sanguine irrespective of how long it takes the economy to mend itself?

It never happens. Markets are pragmatic, at least in the long term. In the short term, there may be euphoria or liquidity issues or spurts which makes the market behave in certain manner. But, the market has to be pragmatic. It will always be international factors, earnings, quality of earnings, policy initiatives, current events, and all of them shaping up and I hope that never changes. All of that is important.We have seen companies last and survive all kinds of disruptions. When you see management and business with modes, people continue to abide faith in them. Fortunately, we have several of them. The investible basket of such companies has grown very nicely in the last 20-30 years. So, you will see both—some of the strong the management business with modes and some others which are more affected by the immediate earnings outlook. In that sense, it is a wonderful market.

Are you lot more sanguine than you have been in the preceding year?

Absolutely. We are itching to put money to work.

Do you think some of the measures which were implemented midway through the term like the GST will start bearing immediate results or is it too difficult to predict what will happen to tax buoyancy in next 12-18 months?

Not at all. GST has been among the most spectacular achievements of this government. Soon you will find papers around the world writing about how India’s GST is the best in world ever. Just as we did Rupay and Aadhaar, the GST has been an amazing success. If you go around the country, the murmur and complaints against GST have almost died down. GST is working smoothly. They have found new business models to deal with the GST and things have spooned up. This will be a massive benefit to the economy. This has brought down inflation. This is the only government in the world of some significance which has won an election after rolling out GST and which did not cause inflation. So, these are extraordinary achievements for which all of us should be proud because the GST was not done just by this government, but every political party in every state joined in. So, it is our success and we have rejoiced enough about it. We will get massive rewards of the GST, demonetization because the “two-number ka model” is broken forever.

So, you are optimistic about the ballpark numbers which government is expecting on terms of tax buoyancy in financial year 2020?

I think we need this liquidity boost to the economy. If all this happens in unison, coordination and we have a reasonable monsoon—not that it is as important as it used to be— but at this point of time, we need all the shots going together.